What are the options for a novice trader with s small starting capital? Stock markets, commodities, and bonds are the domain of big investors with huge investment capital. So beginners are left with currency trading and binary options. Both types of instruments are traded online and they allow people to start trading with small amounts of capital, though to decide which one suits you better you need to understand the differences to make a conscious decision.
What is the essence?
FX trader has to answer quite a few questions before opening a position: Where will the price go? How strong will the movement be? Be here a correction within the existing trend? They will determine the specifics of the deal such as entry point, stop and limit orders, potential gains, and losses.
There is just one thing that the binary options trader is concerned with: it’s whether the price for the financial asset (and it is not necessarily a currency) will rise or fall from the current level over a certain period of time. They know exactly how much they will earn or lose when the option expires.
Is simplicity the ultimate sophistication?
Binary options have one distinct advantage: they are ingeniously simple: fixed risks, fixed returns, no extra orders, stops, limits, margins and other nuances to be learned and taken into account while trading currencies. It is a true set-and-forget principle in action.
Though this coin has another not so bright side: the binary options traders have no control over anything. They cannot close the position before the expiry if they see that the price moves against them (some brokers allow you to close early but you will have to pay a percentage of the expected return), and they will lose all the invested capital regardless of how significant the movement was.
On the other hand, forex trading is more flexible, though it comes with a price as higher variability entails more risk for traders.
Safety should be safe!
Let’s face it: binary options brokers are not obliged to obtain a license. Those who decide to get one, are merely providing their traders an additional benefit and thus gain a competitive advantage. In some countries binary options are regarded as financial instruments, however, in many jurisdictions, this form of speculative trading is beyond the law. For example, Israel has imposed a total ban on these instruments, Belgium does not permit to offer binary options to retail investors, while France imposed restrictions on advertising this product.
The regulators are mainly concerned with a conflict of interest that appears to be an integral part of binary options trading. At least at this stage. In the vast majority of cases, the broker is the other party for all transactions with customers. It means that they benefit from traders’ losses. Moreover, traders gain less than their originally invested amount. No matter what.
It is a sort of betting pool: you bet on a price movement for a certain financial asset. If your prediction is wrong, you lose all the money you risked, but if you are right, you receive a return in the amount of 80% of the capital you put in.
In this respect, the binary trading is very much like the forex industry at its infancy, when lots of companies were market-makers for their clients.
Currently, this business model is no longer popular with forex brokers as they provide traders with direct market access and prefer to earn profits on their spreads and commissions, rather than on customers’ losses.
Who is older?
Binary options are a relatively new form of investments, consequently, they are well behind the foreign exchange market in terms of liquidity and turnover. In fact, Forex is the world’s largest market with average daily turnover over $5 trln, the currency trading takes place around the clock five days a week.
The binary options market is hundreds of time smaller, and it is often considered to be non-professional.
The bottom line
Thus, choosing between forex trading and binary options, as novice trader you shall decide on your priorities in the first place.
Do you need a quick start and an opportunity to begin trading with minimal investment, without going into unnecessary details? Then binary options are your choice.
Do you stake on thoughtful investment, liquidity, and long-term profits? Then look for a reputable forex broker and start mastering the art of currency trading.